Tesla's Domestic Supply Chain Investment Guide

It should be pointed out that these two types of companies are not strictly distinct and exclusive. The current evolution is more about the different focuses of the development stage, and has not yet been finalized. For example, while Top is horizontally deploying multiple businesses, it is also continuing to deepen its vertical development in the fields of aluminum die-casting and chassis.

After the internal rules make sense, the next thing to look at is the length cycle of the industrial chain’s evolution.

Tesla has learned from Apple’s combination of software and hardware in its business model, and from Apple’s “independent design + vertical procurement system” in its supply chain, using domestic suppliers on a large scale. This allows us to roughly predict Tesla’s performance based on the trend of Apple’s industrial chain. Dai Chang’s team at Industrial Securities found that since 2009, the performance of the A-share Apple industrial chain has gone through three major cycles[1].

The first wave: 2009-2012, the industry chain first increased its valuation. The second wave: 2013-2017, the industry chain rose on a large scale, driven by performance + innovation. The third wave: 2018-2019, the industry chain saw a new track, giving rise to a new market.

Three rounds of market trends in the Apple industry chain, source: Industrial Securities

After the release of the iPhone in 2007, Apple's groundbreaking product brought high sales expectations, and the valuation of industry chain targets rose first. In the early days, the performance growth of various companies was relatively slow. After entering the Apple industry chain, the capital market gave Apple's industry chain a high valuation because Apple quickly became a hit.

Generally speaking, for most emerging industries, the first stage of valuation has a process of early realization, which is also in line with objective laws.

In September 2013, iPhone 5 was released, and domestic smartphone sales entered a golden period. During this period, Apple's core characteristics were large-scale sales and continuous technological innovation. As sales were fulfilled and exceeded expectations, the industry chain rose on a large scale. Since 2012, Apple's Chinese suppliers have more than doubled. By 2018, among the 766 global suppliers, only those from the mainland have risen to 346.

After 2016, the Chinese smartphone market reached its peak and then began to decline, entering a stage of stock competition. Apple began to focus on the smart ecosystem. For example, the launch of AirPods brought new growth points to the supply chain.

In contrast, Tesla's industry chain is still in the first stage of its early stage, and its supply chain is mainly driven by valuation. So far, Tesla's cumulative sales have reached about 1 million vehicles, which is just 10% of Toyota's sales in the past year. It is clear who is the big brother and who is the little brother.

Whether the two golden lines can continue depends on the subsequent performance of the leader Tesla. The secondary market is optimistic about Tesla's future sales and has made a prediction: it is expected to exceed 2 million vehicles in 2025. There are several driving factors for Tesla's sales growth in the future, including cost reduction, more goods, and more money.

First of all, there is still room for price reduction for the localized Model 3, and the lithium iron phosphate version is being sold at a low price. The SUV Model Y will be launched next year, and the market space is vast. In addition, Tesla is also planning a new product with a lower price than the Model 3. In addition, it has achieved profitability for five consecutive quarters, and the good operation and management status is more conducive to stable R&D investment and continuous improvement of product strength.

Different historical development stages lead to corresponding adjustments in the game relationship between leading enterprises and supply chains, which is also an important reference for us when investing.

Compared with Apple's "strict father" role to the domestic supply chain, Tesla, which has just entered China, can be regarded as a "kind mother."

Apple has always had very strict performance requirements for components, and often sends engineers to component manufacturers for joint development. Tesla tends to focus on core links, and although it will put forward a series of requirements for non-core components, it will also give suppliers a certain degree of autonomy.

In terms of the number of suppliers, Apple has more "spare tires" than Tesla. Apple adopts a multi-supplier strategy for a certain component, while Tesla adopts a single supplier or a main supplier for a single component.

The reason for this difference is that Tesla currently has weak bargaining power and the introduction of a second supplier has limited significance. Second, instead of introducing a second supplier, it is better to improve the process to save costs.

Compared with Tesla, the living environment of non-core component suppliers in Apple's industrial chain with low technical barriers is really worrying. In the early days, they were able to obtain higher gross profit margins by meeting Apple's needs, but after Apple gradually introduced more suppliers, the profit margin was compressed.

In this regard, Tesla was relatively lenient in the early days. After entering China, Tesla implemented a "three-year price lock period" policy for some suppliers, and then adjusted the price after the price lock period. For example, Xusheng Co., Ltd. signed a 10-year supply agreement with Tesla in July 2013. The agreement stipulated that the price would be relatively stable in the first three years, and the specific price would be discussed later.

反映到旭升业绩上，2013-2016 年旭升股份供应特斯拉的零部件品类不断扩充，得益于锁价，期间内公司汽车业务毛利率持续增长，2016 年毛利率高达 57.2%。锁价期结束实行年降政策后，加上承接的低毛利率的 Model 3 零部件订单的释放，2017-2019 年旭升股份汽车业务毛利率显著下降[2]。

Three-year price lock and Xusheng's gross profit changes, source: Kaiyuan Securities

But Tesla also wants to make money in China, and will certainly squeeze suppliers to gain profit margins in the future. In addition, most of the purchasing leaders in China come from traditional car companies, and the subsequent supplier management will be more in line with the annual reduction strategy of traditional car companies. It will be difficult to have such a good job of locking prices in the future.

The loving mother will eventually leave, and the strict father is on the way.

The imaginative Steve Jobs brought Apple to life, and his steady and restrained successor, Tim Cook, strengthened the Apple empire. Of course, he also has a bad reputation in the supply chain: "Inventory Buster." Musk became famous overnight with Tesla, and there should be such a professional manager in charge of the automotive supply chain in the future.

Compared with mobile phones, cars have a longer industrial chain and a larger market space. Domestic companies should seize the current early stage of the "three-step" strategy: get on the bus as soon as possible; sit firmly in the bus and try not to be thrown off; sit well in the bus and try to get into the first-class compartment. After all, the supply chain giants eat the fat meat first, and then consumers can drink the broth.

References:

[1] Dai Chang et al., Industrial Securities: The Golden Decade of Apple Chain, the Golden Era of Tesla - Looking at the Subsequent Opportunities of Tesla Chain from the Evolution of Apple Chain Opportunities

[2] Liu Qiang et al., Kaiyuan Securities: Tesla Series Special Report (IV): Reviewing the Development of Apple’s Supply Chain and Exploring the Long-term Growth Standards of Tesla’s Supply Chain

[3] Liu Weihao, GF Securities Hang Seng, 2019 Mid-term Strategy for the Automotive Industry

[4] New Era Securities, Top Group, a leading enterprise in the automotive NVH industry, emerging businesses open up mid- to long-term growth space